Jason Storm is a research analyst at Pickler Associates. Storm is preparing aneconomic research report on the performance of IT companies in his country.Following successive years of strong profitability, Storm now predicts that theindustry will experience a slump in performance thereby negating theperformance of the companies being followed. His forecast is based ondiscussions with company executives, analysis of historical financial statementsand comparisons with the international IT industry trends. Based on this forecasthe strongly recommends avoiding IT stocks. Storm’s supervisor states that hisforecast and recommendation is contrary to historical industry performance andhis own forecast developed for the local industry. His supervisor also claims thatthe local industry is far behind its international counterpart in terms ofdevelopment making any comparison a waste of an effort.By issuing the research report with his own forecast, Storm will most likely:A. comply with the CFA Institute Standards of Professional Conduct.B. violate the standard relating to diligence and reasonable basis by failing toconduct thorough investigation.C. violate the standard relating to employer loyalty by issuing arecommendation contrary to his employer’s forecasts.Correct Answer: BReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS bIf Storm decides to issue a research report, he will be in violation of the CFAInstitute Standards of Professional Conduct relating to diligence and reasonablebasis. This is because he has failed to investigate the similarity (or lack thereof)between the local and foreign IT market. Storm has not made a thoroughinvestigation and will violate the standards should he issue the research reportwith his recommendation.Members and candidates must take care to ensure that any recommendations areindependently arrived at using their own judgment. They should not come underthe pressure of their employer to issue a recommendation that is contrary to theirown.

The management of Gum Drop Inc., a manufacturing concern, is comparingmerger offers received from two of its competitors. Daisy Howard, Gum DropInc.’s senior executive officer is pushing for the acceptance of the offer. Thedecision of the acceptance rests on three officers including Howard. Believingthat the manufacturer will more than likely go through, she advises her brother topurchase the stock for his clients’ portfolios. To avoid the appearance of conflict,Howard’s brother deliberately avoids purchasing the stock for his sister’sinvestment portfolio, who is also a regular fee-paying client of his investmentfirm.Which of the following CFA Institute Standards of Professional Conduct is leastlikely being violated?A. Fair dealingB. Disclosure of conflictsC. Material non-public informationCorrect Answer: BReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS bHoward’s brother is in violation of the standard relating to fair dealing because hedoes not allocate Gum Drop Inc.’s stock to his sister’s investment portfolio.Members and candidates must act fairly and objectively with respect to theirclients and should not discriminate against family member accounts that areregular fee-paying accounts.The standard relating to material nonpublic information is being violated; this isbecause the merger offer has not yet been finalized and acting on the informationbefore it is disseminated to the marketplace represents a violation of the standard.Howard should not share details of the proposed offer with her brother while thelatter should wait until the information is publically disseminated to the public.There is no evidence that suggests that the standard relating to disclosure ofconflicts is being violated.

ThornGate Associates is an asset management firm with its own researchdepartment. ThornGate manages the investment portfolio of Liwood, an insurancecompany. One of ThornGate’s research analysts has come to know that Liwood iscurrently under financial distress. After a conversation with his supervisor, theresearch analyst learns that the firm is unwilling to release any information thathas the potential to damage its relationship with clients.In order to comply with the CFA Institute Standards of Professional Conduct, theresearch analyst’s best course of action would be to:A. leave the employer.B. request for a change in assignment.C. encourage ThornGate Associates to put Liwood on a restricted list.Correct Answer: CReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS cGiven that ThornGate Associates is unwilling to permit dissemination of adverseopinions about a corporate client, the research analyst’s best course of actionwould be to advise his employer to remove Liwood from the research universeand put it on a restricted list.

4.

Kathleen Jones issues a recommendation to buy the Green Corp stock to herclients following a thorough analysis of its expected forecasted performance.Jones has held the Green Corp stock for several years in her investment portfolio.Immediately after issuing the recommendation, she sells the stock from herportfolio to meet a down payment for a boat purchase. Her transaction has notviolated any laws and regulations.Is Jones’ personal transaction in violation of the CFA Institute Standards ofProfessional Conduct?A. No.B. Yes, she will benefit personally from the trade.C. Yes, she is not allowed to undertake transactions in a stock, which she hasrecommended for her clients.

Correct Answer: AReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS aAccording to the CFA Institute Standards of Professional Conduct relating topriority of transactions, there is nothing unethical about trading contrary to anissued investment recommendation as long as 1) clients are not disadvantaged bythe trade, 2) the investment professional does not benefit personally from tradesundertaken for clients and 3) the investment professional complies with applicableregulatory requirements.Selling the stock to meet a down payment provides evidence that she is notpersonally benefiting from undertaking the trade. In addition, her clients are notdisadvantaged by the trade. Lastly, her action complies with legal and regulatoryrequirements, which confirm that her actions are not in violation.5.

Transactions made on behalf of family member accounts for which members orcandidates do not have beneficial ownership:A. are prohibited.B. are subject to preclearance requirements.C. should not supersede those undertaken for non-family member clientaccounts.Correct Answer: CReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS aFee-paying family member accounts in which members or candidates do not havebeneficial ownership should be treated in the same way as regular client accounts.These accounts must not be given special treatment nor disadvantaged. However,it is incorrect to state that such transactions are prohibited.If a member or candidate has a beneficial ownership in a family member account,(s) he will be subject to preclearance requirements. This is not the case if there isan absence of beneficial ownership.

Wade Thomas is the senior portfolio manager at West Horizons, a firm providingbrokerage and asset advisory services. Over the past two years, West’s clientportfolios have not been generating the returns promised by Thomas. Afterreceiving complaints from several clients Thomas decides to allocate a portion ofclient accounts to an emerging market equity fund being managed by his brotherin-law, Steve Harris. Following the allocation, portfolio risk increases beyondclient risk tolerance levels. Thomas strongly believes high expected returns willcompensate for this increased risk in the months to come. He decides to delaynotifying clients about the change until the perceived returns are generated.Thomas is in violation of the CFA Institute Standards of Professional Conductbecause he:A. has failed to consider the suitability of the allocation to client accounts.B. has not disclosed the fact that the equity fund is being managed by Harris.C. is not permitted to reallocate client funds without receiving priorpermission.Correct Answer: AReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS aThomas is in violation of the Code and Standards primarily because he has failedto consider the suitability of the allocation for client accounts. The risk of thesecurities exceeds the risk appetite of his clients and so he has failed to understandhis clients’ risk profiles and is in violation of the standard relating to suitability.Thomas is not required to disclose the fact that the equity fund is being managedby Harris. Managers are free to select their own brokers and, since there is noconflict of interest resulting from the allocation, Thomas is not in violation.As a portfolio manager Thomas is fully authorized to reallocate client funds aslong as a suitability analysis is undertaken. There is no requirement for theportfolio manager to seek prior permission.

Gregory Spark manages the accounts of several high net-worth individuals. Hisclients have a moderate risk tolerance and the allocation of risky investments isspecifically prohibited as stated in their investment policy statement. Sparkdecides to allocate a portion of each client’s account to an equity index fund. Twoof the securities comprising the fund are highly risky with high expected returns.However, due to the effects of diversification, the overall risk level of the indexfund is moderate when added to client portfolios. One of Spark’s clientscomplains that the risk profile of the risky securities does not match his own.Is Spark in violation of the CFA Institute Standards of Professional Conduct?A. No.B. Yes, he is in violation of the standard relating to suitability.C. Yes, he is in violation of the standard relating to loyalty, prudence andcare.Correct Answer: AReference: CFA Level I, Volume 1, Study Session 1, Reading 2, LOS bSpark is not in violation of any CFA Institute Standards of Professional Conduct.Investment decisions must be judged in the context of the total portfolio ratherthan by individual investments within the portfolio. Therefore, since the riskprofile of the index fund matches that of individual investors’, the allocation doesnot constitute a violation of the CFA Institute Standards of Professional Conduct.

Leslie Hower is attending an investment conference in Geneva, Switzerland onbehalf of her employer. At the conference the guest speaker makes two commentswith respect to the implementation of the CFA Institute Standards of ProfessionalConduct in an investment management firm.Statement 1: While members and candidates are permitted to rely on secondary orthird-party research, the duty to verify the soundness of researchrests solely on the individual alone.Statement 2: A member or candidate who knows or should have known thatinformation, which could have influenced the investment decision isbeing omitted, is in violation of the standard relating tomisrepresentation.The speaker is most likely correct with respect to:A. Statement 1 only.B. Statement 2 only.C. both of the statements.Correct Answer: BReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS aThe speaker is incorrect with respect to Comment 1 but correct with respect toComment 2.The CFA Institute standard relating to misrepresentation requires members andcandidates ‘to not knowingly make any misrepresentations relating to investmentanalysis, recommendations, actions or other professional activities’. “Knowingly”means that the member or candidate knows or should have known that themisrepresentation was being made or that omitted information could alter aninvestment decision.Members and candidates, who rely on secondary or third-party research, mustmake reasonable and diligent efforts to determine whether the research is sound.They may rely on others within the firm to determine whether secondary or thirdparty research is sound and use that information in good faith.

Janice Mahkoub is an investment manager at Page Associates. She has receivedan offer to serve on the board of a charitable institute. Her duties includemanaging $2 billion in charitable donations. Given that her line of work does notrelate to providing investment advice, she accepts the offer without informing heremployer.Are Mahkoub’s actions in compliance with the CFA Institute Standards ofProfessional Conduct?A. Yes.B. No, she should have not accepted the offer.C. No, she should have notified her employer prior to accepting the offer.Correct Answer: CReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS b & cMahkoub is in violation of the standard relating to employer loyalty. As a boardmember, Janice will be responsible for managing a considerable sum of funds,which will occupy a significant amount of her time. Thus, she is required to notifyher employer prior to accepting appointment and received consent.

Boyle Thomas is the asset advisor at Marshall Associates who is allocating clientfunds to an EFT. A common trait shared by his clients is their distaste for thestock of corporations with poor environmental practices. Out of the three stocksallocated, one of them belongs to a corporation that has recently disposed itsindustrial waste in a nearby river. The other two stocks belong to corporationswith environmental-friendly practices.Are Thomas’s actions consistent with the CFA Institute Standards of ProfessionalConduct concerning suitability?A. No.B. Yes; since inclusion of the two stocks is consistent with clientrequirements, the allocation as a whole passes the suitability test.C. Yes; Thomas is not responsible for verifying the suitability of eachindividual investment when allocating stocks from ETFs to clientaccounts.Correct Answer: AReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS bThomas’s actions are inconsistent with the standard relating to suitability; this isbecause he has failed to consider the clients’ distaste (which is a unique constraintspecified in the IPS). Regardless of the type of investment being recommended ormanaged, members and candidates in an advisory relationship are required toconsider the suitability of each investment in the context of the entire portfolio.

12.

To prepare her research report, Sonia Graham is using a stock return forecastingmodel prepared by Victor Patel, a former employee at the firm she serves, ARBCapital. She concludes her report by identifying ARB Capital as its designer andstating a model forecast accuracy of 60%.Is Graham in violation of the CFA Institute standard relating tomisrepresentation?A. No.B. Yes, she is guaranteeing investment results.C. Yes, she has not given credit to the Patel in her report.

Correct Answer: AReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS bGraham is not in violation of the CFA Institute Standards of Professional Conductrelating to misrepresentation. Singh is not attempting to guarantee stock returns.Simply identifying a forecast accuracy percentage does not constitute a violationof this standard.Despite Patel no longer serving the ARB Capital, the firm retains the right tocontinue using the work completed after he leaves. Graham is allowed to issuereports in the future without providing attribution to the prior analysts. Given thatshe has identified the firm as the designer of the model and not herself, she is incompliance with the misrepresentation standard.13.

Thorntop Associates is a research firm which publishes its reports in print and onits official website. Graham Barnes is Thorntop Associates’ chief researchanalyst. With the permission of his employer, Barnes uploads reports prepared byhim on his personal website in addition to the firm’s. On his website, Barnes signsoff his reports using his name.Barnes has most likely:A. failed to disclose any conflicts of interest in preparing reports.B. misrepresented his relationship with Thorntop Associates on his website.C. not violated any standards since he has obtained permission to uploadreports on his website.Correct Answer: BReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS b

Barnes has violated the CFA Institute Standards of Professional Conduct bygiving the impression that he works as an independent analyst rather than anemployee of Thorntop Associates. The standard concerning misrepresentationprohibits members and candidates from knowingly making anymisrepresentations relating to investment analysis, recommendations, actions orother professional activities.There are no conflicts of interest evident in the case that mandates disclosure.14.

Actions that construe violations of the CFA Institute Standards of ProfessionalConduct concerning misconduct most likely include:A. personal bankruptcy resulting from gambling in a casino.B. workplace negligence which causes the firm to lose millions of dollars.C. serving time in a juvenile as a teenager after being found guilty of drugpossession.Correct Answer: BReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS bThe standard concerning misconduct prohibits members and candidates fromengaging in any professional conduct involving fraud, deceit or dishonesty orcommitting any act that reflects adversely on their professional reputation,integrity or competence.Negligence in the workplace reflects adversely on a member’s or candidate’sprofessional competence; this action construes a violation of the standard.Bankruptcy resulting from gambling in a casino does not reflect adversely reflecton the member’s or candidate’s professional integrity and does not construe aviolation of this standard.Similarly being found guilty and serving time in a juvenile due to drug possessioncharges does not construe a violation of this standard; this is because this timewas spent several years ago and does not adversely affect one’s professionalcompetence, reputation and integrity.

With respect to voting proxies, an investment manager will most likely be inviolation if he:A. votes all proxies.B. fails to cast a vote.C. fails to disclose proxy voting policies.Correct Answer: BReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS bAn investment manager is in violation of the CFA Institute standard relating toloyalty, prudence and care if (s) he fails to cast a vote. Part of amember/candidate’s duty is to vote proxies in an informed or responsible manner.Failing to cast a vote represents a violation of their duty of loyalty, prudence andcare.Voting all proxies does not necessarily construe a violation of the standardrelating to loyalty, prudence and care if the investment manager has carried out acost benefit analysis and determines that it is necessary.Although the standard recommends members and candidates disclose proxyvoting policies, this does not represent a requirement.

Theodore Simpson is the chief portfolio manager at L.T. Associates. He alsoserves on the board of a charity hospital, which is in the knowledge of hisemployer. Simpson routinely trades his accounts through West Brokers thatprovides average execution for a fee, which is lower relative to others.Dissatisfied with West Brokers’ performance over the past two years, Simpsonmoves his client accounts to Abe & Smith, which is well-reputed for its ability todeliver above-average portfolio returns. However, the broker charges a high feefor its services. Following the shift, Simpson prepares a written memo with newsof the change in broker. He intends to send this memo to his clients around thetime quarterly client account statements are dispatched.Are Simpson’s actions in violation of the CFA Institute Standards of ProfessionalConduct?A. No.B. Yes, he has failed to notify clients of the change in broker on a timelybasis.C. Yes, by using Abe & Smith as a broker Simpson is not acting in hisclients’ best interests.Correct Answer: AReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS bSimpson’s actions are consistent with the CFA Institute Standards of ProfessionalConduct. He has used client brokerage to pay for high quality brokerage services.The high cost of the services is justified by the quality of services. In this regard,Simpson has upheld his duty of loyalty, prudence and care.As long as Simpson informs his clients of the change in brokerage firm, he is notin violation of any standards of professional conduct. The standard concerningcommunication with clients and prospects requires members and candidates toinform clients and prospects about the changes to the investment process on anongoing basis.

An investment firm retains its records for a maximum period of five years afterwhich they are disposed off. Local regulations require firms to retain records forat least four years.In order to comply with the CFA Institute Standards of Professional Conduct, theinvestment firm should dispose its records after:A. four years.B. five years.C. seven years.Correct Answer: AReference:CFA Level I, Volume 1, Study Session 1, Reading 2, LOS cThe investment management firm’s record retention policy does not violate localregulations; this is because local regulations specify a minimum period forretaining records. Thus the firm is at liberty to choose how long it retains recordsafter this period.The CFA Institute requires members and candidates to comply with local recordretention regulations. In the absence of such regulations, a minimum seven yearholding period should be observed.

18.

Two months ago Leslie Hower sat for the CFA Level III exam that she passed onthe second attempt. Hower has been working as a full-time employee at a bank forfive years and continued working even during her study years.In a discussion with her colleague and study partner Hower states, “After passingall three levels of the CFA exam program, my past work experience will make meeligible for receiving the CFA charter upon application.”Hower’s statement is most likely:A. not in violation of the CFA Institute Standards of Professional Conduct.B. is in violation of the standards as she is making guarantees tied to the CFAdesignation.C. is in violation of the standards as she implies that she has passed all threelevels on the first attempt.

Correct Answer: BReference:CFA Level I, Volume 1, Study Session 1, Reading 2, Pages 143-144, LOS bHower is in violation of the standards of professional conduct as she is makingguarantees tied to the CFA designation. The final award of the charter as well asjudging whether her work experience matches the requisite experience criteriarests on the CFA Institute.Hower has simply stated that she has passed all three levels and by doing so doesnot attempt to imply that she has never failed.

Correct Answer: CReference:CFA Level I, Volume 1, Study Session 3, Reading 9, LOS nShortfall risk is the risk that portfolio value may fall short of some minimumacceptable level over some time horizon; the risk that plan assets fall short of planliabilities is known as shortfall risk.Value at risk is a money measure of a minimum value of losses expected over aspecified period of time.21.

In contrast to simple sampling, samples in stratified sampling:A. are not drawn randomly.B. produce less precise estimates of parameters.C. fully represent each population subdivision of interest.Correct Answer: CReference:CFA Level I, Volume 1, Study Session 3, Reading 10, LOS cAn advantage of stratified random sampling is that it guarantees that populationsubdivisions of interest are represented in the sample. Stratified random samplingdivides the population into sample based on one or more classification criteria andemploys simple random sampling to draw samples from each stratum.An advantage of stratified over simple random sampling is that estimates ofparameters produced by the former is more precise (have a lower variance ordispersion) than estimates obtained from the latter.

Over the past 12 years, Algeria’s stock market index generated positive returns inonly 8 years. Maria Alfonso has collected the returns over these eight years in theexhibit below:Year12345678

Annual Return (%)8.912.514.122.727.831.938.645.7

The third quintile lies in the distance between:A. 27.8% and 31.9%.B. 31.9% and 38.6%.C. 38.6% and 45.7%.Correct Answer: AReference:CFA Level I, Volume 1, Study Session 2, Reading 7, LOS fThe third quintile corresponds to the 60th percentile (3/5 × 100). Based on theeight years in which positive returns are generated, the third quintile lies in thedistance between 27.8% and 31.9%.L60 = (n + 1)

= (8 + 1)

= 5.4

The 60th percentile lies between the 5th and 6th items in the table or between27.8% and 31.9%.

A company has concluded job interviews by short listing ten candidates each ofwhich has an equal probability of being selected. The probability that the numberof candidates selected less than or equal to seven but more than four is closest to:A. 3/10.B. 4/10.C. 7/10.Correct Answer: AReference:CFA Level I, Volume 1, Study Session 3, Reading 9, LOS f.

The power of a test represents:A. a Type I error.B. the confidence level.C. 1 – probability of a Type II error.Correct Answer: CReference:CFA Level I, Volume 1, Study Session 3, Reading 11, LOS d.The power of a test represents the probability of correctly rejecting the nullhypothesis when it is false; that is, the power of a test represents 1 – probability ofa type II error.

28.

Walsh Emerson is contemplating the inclusion of a South American commoditystock to his investment portfolio. Emerson will opt for the investment if the stockachieves a mean monthly return of at least 4.5%. Over the past twelve months, thestock achieved a mean monthly return of 3.8% with a sample standard deviationof monthly returns of 7.4%. A portion of the distribution table is displayed below:

df101112

Significance level0.100.051.3721.8121.3631.7961.3561.782

Assuming the returns are normally distributed and using a 10% confidenceinterval, should Emerson make the investment?A. Yes.B. No, because the hypothesized mean value falls within the confidenceinterval.C. No, because the hypothesized mean value falls outside the confidenceinterval.Correct Answer: AReference:CFA Level I, Volume 1, Study Session 3, Reading 11, LOS g

The hypothesis test is stated as H 0 : θ ≥ 4.5% versus H a : θ < 4.5% and so thiscan be identified as a one-tailed hypothesis test.The population variance is not known and therefore, a t-test is used with 12 – 1 =11 degrees of freedom. The rejection points for this one-sided test are 1.363 and –1.363.The test statistic is calculated as follows:3.8 − 4.5= −0.32769t11 =7.4 24Since the t-statistic does not satisfy either t > 1.363 or t < - 1.363, the nullhypothesis is not rejected. This implies that the population mean monthly returnof 4.5% is consistent with the 12-month observed data series and that the investorshould invest in the commodity stock.29.

On a given trading day, a stock peaked at $41.23 before falling to $38.50. Twodays later, the same stock’s price rose to $41.21 after which it again started todecline. A stock market analyst identified the price pattern as a double-top.Based on the identified pattern, the price target is closest to:A. $35.79.B. $41.21.C. $41.23.Correct Answer: AReference:CFA Level I, Volume 1, Study Session 4, Reading 12, LOS dPrice target = $38.50 – ($41.21 – $38.50)= $35.79